What Is A Charitable Remainder Trust?

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I am all about making money and making a difference, and when I learned about the charitable remainder trust I knew I had to write an article about it for my Money & Mimosas readers.

What is a Charitable Remainder Trust?

A charitable remainder trust (CRT) is a way for you to earn money while also donating to your favorite charity or charities.

Yep, you read that right.

The technical definition is: A charitable remainder trust is an irrevocable trust that generates a potential income stream for you, as the donor to the CRT, or other beneficiaries, with the remainder of the donated assets going to your favorite charity or charities.

The flexibility of a CRT means that it can be a helpful addition to building wealth for your family and/or for your tax management strategy.

How does a charitable remainder trust work?

A charitable remainder trust is a “split-interest” giving vehicle. This means that two parties benefit from the set-up. One party can be you or another individual that you name to receive a potential income stream for a period of time. The other party is the charity or charities that will receive the remainder of the donated assets.

Charitable Remainder Trust Money & Mimosas

There are two main types of charitable remainder trusts:

  • Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year. Additional contributions are not allowed.

  • Charitable remainder unitrusts (CRUTs) distribute a fixed percentage based on the balance of the trust assets (the value is reassessed every year). Additional contributions can be made.

It is important to keep in mind that contributions to any type of CRT are irrevocable, therefore the donated assets must be distributed to the donor or another named beneficiary. The money can not be taken out for another reason. Once the term is completed, the remaining trust assets will be distributed to your favorite charities.

How do you get started?

1. Make a partially tax-deductible donation
You can donate cash, stocks, or non-publicly traded assets such as real estate, private business interests, and private company stock. The amount you’ll be able to deduct from your taxes is based on which type of CRT you are using, the term of the trust, the projected income payments, and the interest rates on the trust assets which are determined by the IRS.

2. You or your chosen beneficiaries receive an income stream
Depending on how you set up the trust, you and/or your beneficiaries can receive income on an annual, semi-annual, quarterly, or monthly basis. There are rules around how much of the assets can be distributed. Be sure to consult your wealth manager for these details.

3. After the specified timespan or the death of the last income beneficiary, the remaining CRT assets are given to your favorite charities.
The charities can be public or private foundations. Depending on how you set up the trust, the charity may or may not be able to change.

It is important to note that the minimum to open a CRT usually hovers around $250,000.

What assets may be donated to a CRT?

You can use the following types of assets to fund a charitable remainder trust.

  • Cash

  • Publicly traded securities

  • Some types of closely-held stock (with the exception S-Corp stock)

  • Real estate

  • Certain other complex assets

What are the benefits of using a CRT?

  • Maintain the value of long-term assets: For example, if you have a non-income-producing property, a CRT allows you to contribute that property to the trust, and it is tax-exempt when the trust sells. This means that the value of your property will not be eroded by large capital gains taxes, allowing for more income to be distributed to you and your favorite charities.

  • Income tax deductions: When you fund a CRT, you have the potential of a partial income tax deduction.

  • Tax-exempt: The CRT’s investment income is exempt from tax. This makes the CRT a good option for asset diversification. Keep in mind that while you can eliminate capital-gains taxes, the beneficiary may still be subject to income tax. As always, consult a licensed tax professional for specific details.

  • More money, bigger impact: You can create even more tax-saving and positive impact opportunities with your CRT when you combine it with a donor-advised fund.

Is a charitable remainder trust right for you?

The CRT is an option worth considering if you want an immediate charitable (tax) deduction, but also have a need for an income stream for yourself or another person.

It is also a good option to recommend to an elder in your family who wishes to pass on a legacy of wealth, where a portion of the income can be distributed to heirs while the other portion goes to charities that are meaningful to your family. More and more estate planners are turning to this option since the stretch IRA was eliminated in December 2019 by the SECURE Act.

The stretch IRA, also known as the life expectancy payout, was something that wealthier retirees would use to maintain their family's wealth by naming the youngest person in their family as a beneficiary. By using the stretch strategy, an IRA could be passed on from generation to generation, taking advantage of tax-deferred and/or tax-free growth of the assets within it. They would “stretch” out the payouts from the IRA thereby stretching out the tax advantages. The 2019 SECURE Act, changed all of that when it declared that beneficiaries who inherited IRAs after December 31, 2019 needed to withdraw all of the funds within ten years of inheritance.

A CRT does not completely replace the stretch IRA, but it is an option that offers similar tax saving benefits.

In conclusion

Like most philanthropic vehicles, it is a personal decision as to whether or not this product will work for you. The CRT is a strategic way you can give back while also maintaining wealth for your family.


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Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.